Unless we are headed into a hyper-inflationary period such as that we saw in the mid-1970s and early 1980s.

Inflation and Interest Rates

This is a nuanced situation. Most people writing about inflation and rates or programming computers that implement trading programs to react to news that might change their trajectory do not get the complexity of what they are writing about. They operate with the simple proposition that both are bad. Most have not studied the issues facing the market 40 years ago. Many were not even alive. A moderate increase in rates and inflation (not runaway) would be very beneficial. If you, in your heart-of-hearts, believe that type of severe environment is on our doorstep, and if you are really good at market-timing, be my guest … SELL!. If the moon, the sun and the stars align you will save yourself a lot of pain. If, on the other hand, inflation and rates move up at a gradual pace over the next few years you could be missing out on another wonderful leg up in the current bull market.

I’m in the moderate pace camp

Why? Because I believe we are in the beginning stage of coming out of a two decade period of severe deflationary pressures caused by the advent of world-wide competitive labor and capital markets … in a word, globalization. Globalization has kept wage growth in check in the developed world and it has kept the pressure on manufacturers to keep prices low to compete with foreign made goods. In the case of US corporations global competitive pressures have removed an important tool from their growth tool box … PRICING. For most of the past 20 years, corporations have had to rely on unit growth and financial engineering (mergers and acquisition and stock repurchases) to move the profit ball ahead. There has been no pricing. Globalization continues to be a drag on inflation and will probably continue to be so moving forward. This would bolster the case for a measured pace on the inflation front and, as the price of money in part depends on inflation, it would seem to auger well for moderately rising rates. My sense is, based on every Fed pronouncement I’ve heard, this is where the Fed’s collective judgment is today.